Japanese Markets Awaken With Wild Swings

By

Kana Inagaki,

Eleanor Warnock and

Takashi Mochizuki

Updated April 6, 2013 4:21 a.m. ET

TOKYO—Japan's financial markets, long some of the sleepiest in the world, erupted in activity late last week, logging wild price swings on skyrocketing volumes, and gluing traders to their screens for hours.

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The yield on the benchmark 10-year Japanese government bond, whose biggest daily move in all of last year was around a 30th of a percentage point, swung 10 times farther on Friday, plummeting to 0.315%—which some Tokyo strategists said was the lowest ever for any equivalent government bond—then rocketing up to 0.620%, before settling at 0.460%.

Stock trading on the first section of the Tokyo Stock Exchange hit a record of 6.45 billion shares, while the yen hit a 3½-year low of ¥97.20 against the dollar, after having traded as high as ¥92.73 on Thursday.

Nomura Securities Co., Japan's biggest brokerage firm, said its retail business on Friday traded more shares, by value, than it had ever done before, even during Japan's 1980s stock-market heyday.

"The volatility we saw today across all asset classes—rates, FX and equities—was unprecedented,'' said Brendan O'Dea, head of equity markets in Japan at Citigroup Inc. "It's going to take some time for people to price in'' the new investment environment.

On Thursday, Japan's central bank unveiled a plan to buy trillions of yen more in government bonds and other assets, as part of a new easing campaign to depress long-term yields and eventually revive the long-stagnant economy. The aggressiveness of the plans surprised investors, sending stocks whipsawing, the yen tumbling and government-bond yields to record lows.

Traders in Tokyo had braced for the news, which was released after the first policy-board meeting under the BOJ's new activist governor. Traders prepared multiple scenarios for the new easing plan, even coordinating bathroom breaks so trading desks wouldn't be caught understaffed when the headlines started to roll.

At Crédit Agricole in Tokyo, director of foreign exchange Yuji Saito said he had some spicy Thai food and a strong Starbucks coffee to make sure he was alert for the announcement.

Takumi Nomura, senior manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ, recalls being "nailed to my desk from before noon. I was nervous about running out, even to go to the bathroom, and people in our team took turns.''

Mr. Nomura said he had instructed the 10 members of his team to prepare a list of possible easing measures and gauge how aggressively the bank was pursuing each one, shouting out "strong'' or "weak'' after each step was announced. For a while after the news broke, Mr. Nomura said, he heard only shouts of "strong'' and "big.'' Then a deluge of client calls started rolling in, and "we didn't have time to check the news and just got swallowed by the market,'' he said.

The confusion was heightened by a magnitude 5.3 earthquake that hit nearby Chiba Prefecture at 1:42 p.m. Japan time, just as the BOJ news started to roll.

"The people in the Tokyo area were momentarily thrown off," said Tetsuya Kudo, deputy manager in the proprietary-trading department of midsize brokerage Yamawa Securities Co., who says he was so startled his hands stopped moving just as he was scrambling to place buy orders for Japanese stocks.

Market watchers say that, although the turmoil in Japan's markets will probably lessen, activity is likely to stay high—particularly in the market most affected by the BOJ's easing measures: the nearly quadrillion-yen market for Japanese government bonds. Those bonds, particularly longer duration JGBs, will be the principle target of the BOJ's purchases; the bank said it plans to increase its holdings of JGBs by about 50 trillion yen ($513 billion) a year, gobbling up around 70% of new issues. That bond-buying program is more than 60% larger than the U.S. Federal Reserve's monthly purchases of Treasury and mortgage-backed securities as a percentage of the economy.

Many Japanese investors say they were surprised by the boldness of the plan. Ahead of the announcement, a number of bond strategists published reports advising clients to take positions betting that the BOJ would disappoint the markets—pushing bond prices down and yields up—by forgoing aggressive action. When the opposite happened, those investors scrambled to change their positions, bond strategists said, adding to the market's unusual volatility. Several dealers said they had heard the market movements even prompted a large Japanese bank to sell a huge amount of JGBs on Friday, contributing to the temporary drop in prices and spike in yields.

More long-term JGB investors say they are struggling to figure out how to adjust to what is likely to be years of lower yields as the BOJ starts its increased purchases. Many of those investors, such as pension funds and life insurers, say their returns are already too low for their investment needs, but they don't have good alternative places to park their cash.

When asked about the mood on his team during the past two days, one person in the treasury department of a Japanese insurance company replied: "dark.''

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